Banks worried, see ballooning of bad loans in second half of 2020-21

Extending the moratorium on term loan instalments will provide a much-needed relief to companies stressed due to lockdown, but banks are likely to take a hit since this is also expected to significantly add to their non-performing assets (NPAs) from the second half of 2020-21.

According to data provided by different banks, nearly 25-30 per cent of their outstanding loans have come under moratorium so far with micro-finance borrowers facing extreme stress, followed by automobile finance, MSMEs, corporate and retail loans. For large lenders like State Bank of India, ICICI Bank, Kotak Mahindra Bank and Axis Bank, the percentage of loans under moratorium is under 30 per cent.

For Bandhan Bank, it is as high as 71 per cent since it lends primarily to micro units. Borrowers opting for moratorium on principal and interest payments include all micro-credit customers, 35 per cent of SME customers, and 59 per cent of NBFC-MFIs.

In the case of ICICI Bank, retail segments saw a higher proportion of customers opting for moratorium. More rural, commercial vehicle and two-wheeler customers too took the moratorium. For Kotak Mahindra, the moratorium in the retail segment is much higher (in value terms) than the wholesale segment. The quantum of book under moratorium has increased since April 2020.

Banks are unlikely to face problems for the next three months as regulatory relaxations will provide them a breather till September in recognising NPAs. Post September, NPAs are expected to shoot up from the current level of around Rs 10 lakh crore. The RBI itself has said GDP growth in 2020-21 is likely to be in the "negative territory" with the "macroeconomic impact of the pandemic turning out to be more severe than initially anticipated", sources in the banking industry said.

"It's like kicking the can down the road," a former banker said.

Apart from the genuine business stress faced by borrowers, bankers are not ruling out a deterioration in credit culture going ahead when monthly instalments and accumulated interest charges become due for payment.

"Post September, when the book under moratorium comes in for repayments, then we would get the real picture on NPAs. But given that people have faced significant reduction in incomes, NPAs would definitely rise. From industry-wide gross NPA level of around 10-11 per cent, I would expect it to rise up to as much as 15-16 per cent in the next couple of years," a senior banker said, asking not to be named.

Bankers have flagged this issue in meetings with the finance ministry and the Reserve Bank of India.

Bankers led by SBI Chairman Rajnish Kumar welcomed the RBI move, saying "extension of moratorium till August 31, enlargement of the Large Exposure Framework and option to convert accumulated interest for moratorium period into term loan are welcome measures."

The RBI on Friday permitted banks and NBFCs to allow a further 3 month moratorium i.e from June 1 to August 31, 2020 on the payment of instalments in respect of term loans outstanding as on March 31, 2020. Lenders have also been allowed to convert the accumulated interest on working capital facilities over the deferment period into a funded interest term loan facility, which has to be repaid by March 31, 2021.

Banks expect more people to opt for moratorium facility as sectors such as aviation, tourism, hospitality, transportation and start-ups have seen not just salary cuts but also layoffs. MSMEs have got some breather with the government deciding to provide 100 per cent guarantee on loans totaling Rs 3 lakh crore.

"(Moratorium extension) is a timely move to help customers in avoiding the delinquency tag and lenders to protect asset quality. However this will adversely impact repayment culture and a spike in delinquency is expected after expiry of moratorium. Lenders will have to keep in touch with all customers, particularly those on moratorium, and suitably communicate with them to begin repayment after expiry of moratorium," said Deo Shankar Tripathi, MD and CEO, Aadhaar Housing Finance.

"The decision to convert interest payment into a term loan payable during the course of FY21 essentially increases the payback cycle," said Aswini Sahoo, Chief Investment Officer, Asset Reconstruction Company India (Arcil).

Sources said NBFCs and state-owned banks will face the biggest challenge, while for private lenders the impact will depend on the composition of their loan book. "Continuation of standstill provision for NPA recognition till August 2020 will provide an interim relief on reported NPAs for lenders. Nevertheless, the macro challenges this fiscal and their impact on fundamental credit quality of borrowers will manifest in an increase in NPA levels across asset classes for both banks and NBFCs once the moratorium is lifted," said Krishnan Sitaraman, Senior Director, CRISIL Ratings.

For most banks, a higher proportion of their retail book appears to be under moratorium, according to HDFC Securities. Several borrowers opting for moratorium had sufficient account balances or undrawn lines indicating that borrowers wanted to keep extra liquidity. One banker said there have also been instances of eligible borrowers requesting moratorium retrospectively, asking for refund of payments drawn to their accounts.